Editorial: Solar Trade War With China

When the Commerce Department slapped tariffs on Chinese solar panels last year, industry analysts had good reason to worry that it would spark a costly and counterproductive trade war. Now, in another example of why tariffs and other trade barriers should be imposed with extreme caution, their fears are being borne out. In retaliation for last year’s penalties, the Chinese government has begun enforcing tariffs of its own on American polysilicon, an ingredient in solar panel manufacturing.

U.S. polysilicon makers account for about a quarter of the international market, much of their product shipped to China. Or at least that was the case last year. In the beginning of 2013, Michigan-based Hemlock Semiconductor announced that it was firing hundreds of workers, perhaps for good, partially in anticipation of the trade restrictions that have just been phased in. Upon hearing that the Chinese government would punish U.S. firms, stocks of non-U.S. polysilicon makers soared. Tariffs on both sides, meanwhile, promise to push up the price of solar equipment in the United States.

Backers of the U.S. decision to penalize Chinese solar panel imports last year argue that China is the one to blame for all of this. And they have a point. State support for China’s solar industry led to an explosion of manufacturing in the country, which then flooded the world with cut-rate panels. China ended up dominating solar panel production, making about two-thirds of the globe’s supply.

But finding the right response is harder than mustering resentment at Chinese trade practices. It’s hard to know how much the Chinese state subsidizes its solar-panel industry. And, as the plight of the United States’ polysilicon makers helps show, retaliatory tariffs bring complicated trade-offs that can’t be ignored. If the U.S. solar industry depended on panel production, then tariff-backers might have had a better case that the exercise has been worthwhile. Yet the recent explosion in the U.S. solar industry has centered not on panel manufacturing, but on domestic installation and maintenance. That, in turn, was partially fueled by access to cheap Chinese equipment — which the tariff policy views as a problem to solve.

The least-bad news is that the parties are still talking amid all of this trade bickering. The European Union struck its own deal with China on this issue. And while it would have been better had the E.U., the U.S. and China agreed to a grand bargain together, the U.S. and Chinese governments should still be able to negotiate their own accord. That is how they should have resolved this dispute in the first place.